Pakistan finalises $21b LNG deal with Qatar

Published: February 20, 2015
Email
The government has not clarified what the pricing formula is, though LNG contracts are typically priced at a 10-15% discount to Brent, the global benchmark of crude oil. PHOTO: FILE

The government has not clarified what the pricing formula is, though LNG contracts are typically priced at a 10-15% discount to Brent, the global benchmark of crude oil. PHOTO: FILE

ISLAMABAD: 

In a major breakthrough, Pakistan has managed to secure a $21 billion long-term contract from Qatar to supply liquefied natural gas (LNG) at a highly attractive price, a move that is likely to help alleviate some of the severe, chronic shortages of natural gas in the country.

Under the terms of the agreement, Qatar will supply Pakistan with 500 million cubic feet per day (mmcfd) of LNG under a pricing formula that translates to a current price of LNG of $7 per million British thermal units (mmbtu), a price lower than that paid even by Indian importers, who are currently paying close to $9-$10 per mmbtu.

The government has not clarified what the pricing formula is, though LNG contracts are typically priced at a 10-15% discount to Brent, the global benchmark of crude oil. The price does not include the cost of shipping the LNG to Karachi, which can be substantial.

While the new deal is likely to be a welcome injection of supply into the national gas grid, it will not come close to solving the overall natural gas shortages which have crippled large parts of the economy. Pakistan’s total production of natural gas is currently close to 4,000 mmcfd, while demand is closer to 6,000 mmcfd. The 500 mmcfd from Qatar would, therefore, only fill about a quarter of the current shortfall.

The $7 per mmbtu price, while attractive relative to where the overall LNG market stands, is still more expensive than the $5 per mmbtu the government would currently have been paying had the Iran-Pakistan gas pipeline been fully built and operationalised by now. Price differences between LNG imports and pipeline gas are natural: the price of the LNG includes the cost of chilling it down to minus 170 degrees Celsius, whereas pipeline gas does not have that cost.

The United States has been pressuring Pakistan to import LNG from Qatar, even though gas from Iran would be cheaper because Washington wants to sustain sanctions pressure against Tehran in order to dissuade it from developing nuclear weapons. Several US and European oil companies also have a presence in the Qatar petroleum and natural gas industry.

At a meeting of the Cabinet Committee on Energy on February 12, Prime Minister Nawaz Sharif had been informed that the agreement with Qatar Gas had been finalised and that the price was set at a level lower than the ones paid by other countries in the region. Other countries had also expressed an interest in supplying LNG to Pakistan, but Qatar is the closest large supplier, which would reduce shipping costs significantly.

The LNG import terminal at Port Qasim, being constructed by Engro Elengy, a subsidiary of the Engro Corporation, is expected to be completed by March 10, ahead of its March 31 contractual deadline. Two ships carrying 50,000 tons of LNG are expected to then start arriving at Port Qasim each month initially, a pace that would slowly be increased to four ships a month.

Meanwhile, the petroleum ministry is negotiating with the industry association of Compressed Natural Gas (CNG) retailers for the sale of the first shipment.

Given the precarious finances of the energy sector, particularly with respect to the power sector, the government has tried to create a mechanism that would ensure a smooth flow of payments to LNG suppliers. At current prices, each LNG shipment would cost $30 million, which would be paid directly by the finance ministry to Pakistan State Oil, the importing entity, which would then pay Qatar Gas. The payments the finance ministry makes would be deducted from the subsidy payments it owes to independent power producer (IPPs).

The IPPs would be required to provide standby letters of credit of between $20 million and $60 million and an operative letter of credit for one months’ supply of gas utilisation of $10 million to $30 million to PSO.

Published in The Express Tribune, February 20th, 2015.

Facebook Conversations

Reader Comments (10)

  • Woz Ahmed
    Feb 20, 2015 - 12:41PM

    Sounds like excellent news would like to see the price formula and regassification costs before I send the government a congratulatory note.

    The price is very competitive compared to the $ 18 we previously were going to accept.

    It should be noted today’s lpg price from the USA is $2.80 (Henry Hub)but obviously shipping in chilled tankers is a huge cost.Recommend

  • Common Pakistani
    Feb 20, 2015 - 12:57PM

    Finally a good move thanks to present government to intervene and renegotiate the previously exorbitant prices. But in a long term, we need to focus on the untapped reservoirs in Balochistan. Recommend

  • pak47
    Feb 20, 2015 - 1:04PM

    Well done PML-NRecommend

  • Mr. Khan
    Feb 20, 2015 - 1:55PM

    Pakistan isn’t getting a discount, LNG contracts are set on oil prices and oil prices are low right now. What happens when the oil prices go up? How does the formula works then?

    Plus, shipping and storage of shipped LNG is literally 30%-40% of the cost hence land route is preferred. Not to mention the infrastructure cost of shipped LNG which requires special terminals. Overall, a terrible deal for Pakistan

    Iran-Pakistan gas pipeline is a cheaper and far better but Nawaz and his Saudi / Arab friends don’t like Iran.Recommend

  • Woz Ahmed
    Feb 20, 2015 - 3:01PM

    It should be noted that domestic gas is sold for $4.50, hence why everyone particulariily the textile sector wants it.Recommend

  • Zain
    Feb 20, 2015 - 7:45PM

    @Mr. Khan: and you will provide the banking for paying Iran? No bank deals with Iranian state enterprises anymore. Sanctions are real. Come out of your dream. Recommend

  • Woz Ahmed
    Feb 21, 2015 - 1:01AM

    @Zain:

    India happily trades with Iran, as do many other countries.

    Either we are so weak or simply have another agenda.

    Can I ask why did we promise to build a pipeline with $3million a day (week?) penalty if we didn’t include a clause saying subject to sanctions being lifted. Then stating we can’t do anything after Iran spent hundreds of millions, because of sanctions ? Then we beg them not to enforce the penalty.

    As normal, something dosent add up, no wonder we are classified as fai
    Ed/ failing stateRecommend

  • Shuaib
    Feb 21, 2015 - 2:43AM

    Lowesr price we could possibly get!! Alhamdulillah!!

    Allah bless PMLN for this!!Recommend

  • woody
    Feb 21, 2015 - 9:32PM

    If the deal is actually done then why no disclosure of either the pricing formula or transportation cost? The only price that counts is the landed price of LNG and this article studiously avoids disclosing that – why is that?Recommend

  • Ridwan
    Mar 1, 2015 - 1:10AM

    @Woz Ahmed:

    Don’t jump on the bandwagon saying we are a failed state. We’ve heard this since 1971 and it’s still untrue. Pakistans per capita income is only a few hundred dollars less than that supposed superpower next door, and our economy is improving and violence has dropped very sharply. We’ve turned a corner, and it’s time for Pakistanis to realize it.Recommend

More in Business